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THE PERILS OF WAREHOUSING CLAIMS: A PRACTICAL VIEW FROM THE BAR

James Bickford Smith discusses the decision of the Commercial Court in Société Générale v Goldas Kuyumculuk Sanayi and others [2017] EWHC 667 (Comm) to strike out a claim of approximately £500 million for abuse of process.

Reproduced with the permission of the publishers. For further information visit www.practicallaw.com or call 020 7542 6664.

The words “high value international commercial litigation” are perhaps most often seen as a tag line in conference brochures and on website profiles. However, hype aside, truly international cases carry the attendant hazard of needing to progress cases in multiple jurisdictions simultaneously. Understandably enough, clients can be resistant to “ticking all boxes” in all jurisdictions at the same time. Nor are all lawyers as adept as they would like to believe in following the intricacies of procedural narratives emerging in the feedback loops of long trans-jurisdictional conference calls.  An ensuing occupational hazard is the seemingly expedient or cost-saving shortcut that leaves at least one local court distinctly unimpressed.

In Société Générale v Goldas Kuyumculuk Sanayi and others [2017] EWHC 667 (Comm) the Commercial Court has shown that it can take a hard line on ensuing procedural defaults, and specifically that it is unwilling to allow them to be explained away on grounds of negligent advice as to foreign law or procedure, or on grounds of expediency. In the process, it has provided a salutary reminder to all litigators of the dangers of failing to progress claims after issue of proceedings and, particularly, after obtaining injunctive relief.

The facts and procedural history: summary

Popplewell J’s judgment runs to some 29 pages in transcript, but the salient facts to emerge from it are that:

  • Société Générale had a valuable prima facie claim against Turkish and Dubai companies that formed part of the Goldas group. That group took large quantities of gold to manufacture jewellery and other items, at least initially on a consignment basis. The contracts were governed by English law, and, by them, Goldas submitted to the jurisdiction of the English Court.
  • Subsequently Goldas began using Société Générale’s gold without paying on a consignment basis. Goldas contended that the basis of its arrangement with Société Générale had been varied by conduct over many years. Société Générale emphatically disagreed and, after discovering what was happening, sought freezing order relief in London.
  • Société Générale duly obtained worldwide freezing orders (WFOs) in March and April 2008 and issued two sets of proceedings. Neither seem ever to have reached the stage of particulars of claim, nor were prima facie claims in debt quantified. The quantum of the claims seems to have been around US $483 million plus interest, or - perhaps primarily - the current value of 15.72 metric tonnes of gold.
  • Neither claim form was served on the defendants. Service in Turkey was erroneously believed to have been effected, but it had not been because the vagaries following from Turkey’s registered objection to the service routes of Article 10 of the Hague Convention were overlooked. In Dubai, after a first attempt at service was - not uncommonly – unsuccessful, matters were left there.
  • Soon after issuing both claims and obtaining freezing order relief in London, Société Générale decided to focus its attentions instead on bankruptcy proceedings in Turkey.
  • The ensuing decision was to “warehouse” the English claims. Warehousing is, of course, not a legally defined term, albeit it is one that – as we shall see – the judge used; what it meant, in this instance, was that no application was made to the court for directions to resolve the live disputes over whether good service had been effected in Turkey, or how it could be (or whether it should be dispensed with) in Dubai. Neither was there an application to take the case towards either a default judgment, or a trial in which the material evidence and argument would be put before the court in the defendant’s absence so as to found a reasoned judgment more readily enforceable in some jurisdictions than a default judgment would be.
  • The Turkish litigation proved protracted. During its course, some Turkish courts found that it could not be resolved until the English court had resolved the questions before it. However, rather than taking this as a hint to prosecute the English proceedings, Société Générale appealed in Turkey.
  • The primary limitation period passed. Some two years later, the Goldas defendants issued applications for the freezing orders to be discharged and the underlying claims struck out. Two months later, Société Générale applied for orders dispensing with service, or extending time for service of the claim, or for retrospective permission for service by an alternative service, and for summary judgment prior to acknowledgment of service.

Popplewell J dismissed all of Société Générale’s applications and acceded to the Goldas defendants’ core applications. He also ordered an inquiry into damages on the cross-undertaking. Given that the effect of the WFOs is alleged to have been to shut down Goldas’ business, this may itself be of some financial significance.

Abuse of process

This is a column that aims to be of interest to as many civil litigators as possible. Much of Popplewell J’s decision concerns detailed discussion of whether good service was effected in Turkey and Dubai. That is a question fundamentally of the local law of the two jurisdictions and, as such, is of little interest to a wider audience. Nevertheless, some of Popplewell J’s findings as to abuse of process are bound up with that analysis. As abuse needs to be considered “in the round”, and as some of the defaults analysed would likely not have triggered judicial criticism individually, one notes each of the following findings:

  • The claim form in the first action was not lodged as soon as reasonably practicable, but a day late.
  • Service in Turkey was not attempted for over a week, despite a freezing order having been granted complete with tight timelines for the provision of information.
  • The court at the return date was told, wrongly but on the basis of honest belief, that service had been effected in Turkey.
  • After failed service in Dubai, no attempt was made to bring the matter back before the court, despite there being, quite plainly by this stage, numerous reasons for doing so.

These findings combined to convey a general impression of “a casual attitude to the undertakings given to the Court” (paragraph 64), never a good place to begin an attempt to persuade the court to make an exceptional order retrospectively validating steps taken in the proceedings. Ultimately, however, what seems to have been fatal to Société Generale’s application was the following sequence of events:

"At about this time SocGen decided not to progress the English proceedings, at least for the time being. The decision is described and explained by Mr Surgeoner of Clifford Chance in his first witness statement. He says that it was made in the light of advice received from Pekin in mid-April 2008, and Goldas’ non-participation in the English proceedings. The decision is described in these terms: “In the light of the advice from Pekin, SocGen subsequently took the decision to advance matters by instituting bankruptcy proceedings against Goldas in Turkey.  The intention in relation to the English claims was to keep the position under review and revisit the matter once the outcome of the Turkish bankruptcy proceedings was known.” 
[After an application for service in Dubai] no further steps were taken by either party in the English proceedings until Goldas’ applications of 9 February 2016.  SocGen took no active steps to progress the English proceedings until their responsive applications of 12 May 2016. 
Paragraphs 24, 32 Société Générale v Goldas Kuyumculuk Sanayi and others [2017] EWHC 667 (Comm).

The key problem with the tactical decision outlined above was that the English court was never told that it had been made. A secondary problem was that it was one taken against the background of freezing order relief remaining in place. A third problem, more technical, was that from the moment that the intention was to focus on Turkish proceedings and not progress the English ones, the only sound basis for freezing order relief would be under section 25 of the Civil Jurisdiction and Judgments Act 1982 (CJJA). That was not the basis on which the freezing order applications had been made: they had been presented as applications in support of English claims, not Turkish proceedings.

In the face of this situation Popplewell J did not shy away from making strong findings:

SocGen’s failure to effect valid service within the period of validity of the claim form was culpable. If failure to do so in Turkey was the result of negligent Turkish law advice, that does not absolve SocGen of culpability for the failure. It is not a good reason for granting relief but rather a reason for not doing so. As to Dubai, SocGen did invoke the bilateral treaty procedure but had no reason to believe service was validly effected by that route. It simply ignored the response that service had not been effected and let the period of validity for service of the claim form in Dubai expire without making any effort to extend its validity under Rule 7.6 as it should have done.  The Court could then have been asked, if necessary, to authorise service under the treaty by an alternative method as permitted by Article 10(2).  The reason SocGen failed to do so was that it had decided to warehouse the proceedings in favour of pursuing its claims in Turkey through insolvency proceedings, which provides no excuse for such failure.  In short, SocGen deliberately allowed the validity of the claim forms to expire when it knew that service in Turkey was disputed and had no reason to believe that it had been validly effected in Dubai. 
This is especially culpable in circumstances where what occurred amounted to a breach of undertakings given to the Court to secure the freezing orders that the claim forms would be served as soon as practicable.  So far as Dubai was concerned this was simply ignored. So far as Turkey was concerned, this placed a heavy onus on SocGen to investigate and resolve the known dispute about service. SocGen is not absolved from blame for the breach of the undertaking by the erroneous advice from its Turkish lawyers.
52    SocGen then took a conscious decision to try to recover what it claimed was due not in England, but in Turkey by means of insolvency
proceedings, again in the knowledge that Turkish service was disputed and Dubai service
had not been effected. That involved a delay of some 8 years which was only brought to an end by the defendant’s applications. That decision and the consequent delay had two relevant consequences. First SocGen disqualified itself from being able to seek an extension to the validity of the writ. The Rule 7.6 application has been abandoned because it is hopeless: SocGen could not fulfil the requirements of Rule 7.6(3)(b) (taking all reasonable steps to serve within the period of validity) or Rule 7.6(3)(c) (making an application promptly). Secondly the decision and subsequently delay continued beyond the expiry of the limitation period so as to give Goldas an accrued limitation defence."

Paragraphs 24, 32 Société Générale v Goldas Kuyumculuk Sanayi and others [2017] EWHC 667 (Comm). 

Further, Popplewell J made positive findings of abuse of process in respect of:

  • The failure to progress the proceedings expeditiously, having secured a freezing order.
  • The decision to put the English proceedings “on hold”.
  • Breach of undertakings given to the court when applying for freezing orders.

Warehousing

Running through the judgment is heavy criticism of the decision to “warehouse” the English proceedings without informing the court of this. This takes clearest form in the finding, at paragraph 63, that:

For a claimant unilaterally to warehouse proceedings is therefore an abuse of process, and may be a sufficiently serious abuse to warrant striking out the claim in appropriate cases under the line of authority from Grovit v Doctor [1997] 1 WLR 640; see Solland International Ltd v Clifford Harris & Co [2015] EWHC 3295 (Ch) at [54].  It is not necessary to decide in this case whether if Goldas had been validly served, the warehousing of the proceedings was an abuse of sufficient gravity to warrant striking out the claim.  What is clear is that the decision to put the proceedings on hold for such a long period was an abuse, and a serious abuse, which militates against there being a good reason for granting the relief sought on this application.

The significance of this finding extends beyond the instant case. There is increasingly robust jurisprudence in support of striking out claims where there has been “extraordinary and inexcusable delay” in progressing them: see the cases summarised in Wearn t/a Jonathan Wearn Productions v HNH International Holdings Limited [2014] EWHC 3542 (Ch). What Société Générale suggests, however, is that, even if that threshold is not crossed (a question Popplewell J chose not to answer in the paragraph cited above), a decision to warehouse without informing the court of this is in and of itself abusive. While that finding has support in the judgment of Lord Woolf MR in Arbuthnot Latham Bank Ltd v Trafalgar Holdings [1998] 1 WLR 1426, there have been relatively few cases in which such a view has been followed as far as strike out. As such, the warning signal for the future is clear: even in cases where one is not dealing with eight or twelve year delays (as in The Auk [2013] EWHC 4076, warehoused claims may be vulnerable to strike out on grounds of abuse.

Practical lessons

The most surprising aspect of Société Générale v Goldas Kuyumculuk Sanayi and others [2017] EWHC 667 (Comm) is that the solution to the difficulties in which Societe Generale found themselves would – at least from what can be seen in the Judgment - appear fairly simple. They should have informed the Court of developments many years before Goldas applied for strike out. Whether further steps should have been taken is a more nuanced question. An application for a general stay with freezing order relief remaining in place might have proved involved given the need to recast the grounds for relief under section 25 of the CJJA. A further or related application in relation to service prior to the expiry of the validity of claim forms would seem to have been required as well.

In any event, the arguments for bringing an application oneself, rather than responding to one from the Defendants, seem overwhelming. That is not least because such an application would have placed the Defendants in the difficult position of having to decide whether to acknowledge receipt, engage, and potentially submit to the jurisdiction, or leave the application undefended.

It will be noted that the observations made above do not include ones as to when any application should have been made. The reason for that is that the overall assessment must be that even bringing an application when there was a risk of juridical criticism would seem preferable simply to lying low. The least compelling parts of what is otherwise a closely reasoned judgment lie in Popplewell J’s findings as to what the Court would have done had Societe Generale brought applications before it between April 2008 and March 2016. As valid as the criticisms of Societe Generale’s stance may be, the realistic position may have been more straightforward: even if such an application had been brought late in the day the likely course of events at court would have involved a judicial dressing-down, an inquisition into what had happened and was happening elsewhere, followed by an order likely rectifying the position and in any event preserving the causes of action. There are, after all, only a handful of judges who would contemplate the court striking out of its own motion a claim for $483m plus interest. Furthermore, had Goldas appeared at all it would have had significant explaining to do. The Commercial Court is not generally charitable to parties who have no particularly clear explanation for using several metric tonnes of a bank’s gold without paying for them.

Furthermore, while judicial criticism of Societe Generale’s conduct seems justified, it must be said that the wider stance of staying the English proceedings would seem readily justifiable as a matter of principle. If companies from three jurisdictions are litigating in several jurisdictions, and if one of the sets of foreign proceedings is the current focus of their endeavours, the case management arguments for a stay in England are very strong. Moreover, the arguments for a stay before close of pleadings rather than after a trial timetable is set are also strong. It would be unfortunate if Société Générale v Goldas Kuyumculuk Sanayi and others [2017] EWHC 667 (Comm) was taken as authority for the proposition that where a freezing order was in place English proceedings had axiomatically to be progressed. The better explanation for the decision lies in strong judicial disdain for “a casual approach” and a failure to keep the Court informed of developments over many years. As such, the value of the proverbial brief letter to the Court has clearly appreciated rather more since 2008 than the price of gold bullion.
Posted: 05.05.2017 at 16:43
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